In the wake of the recent ruling that a fixed-share partner is a partner, not an employee, Mark Briegal of Legal Futures Associate Ralli looks at the advantages of a fixed share over a salary
Briegal: clear advantages to fixed-share partners
An increasing number of businesses are now using the limited liability partnership (LLP) as a business entity for the whole or part of their corporate structures.
Many traditional professional partnerships (solicitors, accountants, surveyors and the like) have embraced the limited liability afforded by the LLP compared to the traditional partnership. In essence the LLP provides the same tax treatment for partners and the same flexibility of management and ownership of a traditional partnership but without the unlimited joint and several liability that goes with it.
An LLP, like a limited company, is a separate legal entity. So once a new member (as partners in LLPs are technically called) joins or leaves the LLP, there is no need to transfer assets each time. The limited liability of an LLP is an often seen as an attractive option to potential new members.
Different class
Like traditional partnership the LLP can have different classes of member. These include full equity members, restricted members and fixed-share members.
Salaried partners can still exist within LLPs. Like salaried partners in traditional partnerships, despite the partner title they are contractually still employees. Rather than being employees of the partners, they are employees of the LLP. This is advantageous to them as the LLP has limited liability and they are not liable.
Being a salaried partner in a traditional partnership is often a poor place to be – the salaried partner has ostensible authority and full joint and several liability, but no share in the profits. For this reason it is vital that salaried partners have indemnities from the equity partners.
This is not necessary in an LLP, especially where it is made clear that the term “partner” means a member of the LLP or an equivalent employee. Salaried partners are taxed as employees under schedule E and full National Insurance is payable by employer and employee.
A fixed-share member of the LLP is a member of the LLP and is self employed. They are given a nominal percentage of the equity in the LLP, often 0.5%, and guaranteed minimum drawings. They are also usually expected to buy their nominal share for a small amount, often £500 to £5,000, which they should get back if they leave.
So rather than, for example, being a salaried partner on a salary of £50,000 pa, the fixed-share member is given 0.5% of the equity and drawings of £50,000 or 0.5% of the profits, whichever is higher. Most professional partnerships are unlikely to have profits in excess of £10 million and so the fixed-share member draws £50,000. The numbers can obviously be altered to reflect the firm and its profitability. Members of LLPs are self-employed and taxed under schedule D.
Tax advantage
There is no real disadvantage to the LLP, so long as the fixed-share members are bound by an effective LLP members’ agreement in the same way that salaried partners need to be bound by an effective employment contract. The advantage of fixed-share members as opposed to salaried partner relates to significant savings of National Insurance and tax to the LLP and also the member.
By way of example, if a firm has 10 salaried partners earning £50,000 each, employers’ National Insurance will be payable at 12.8%, costing the firm £64,000 under current rates. None will be payable for fixed-share members as they are not employees. The fixed-share member will also pay less National Insurance. As the fixed-share member is now self-employed, he or she has the advantage of being able to offset reasonable expenses, including use of car etc, against his or her tax and so will pay less tax, compared to remaining a salaried employee.
There are other advantages around career development and employees feeling valued. Also banks may be more willing to lend to firms where there are more members. The cynical may also point out that, depending on the terms of the LLP members’ agreement, it may be easier and cheaper to get rid of fixed-share members, who will have fewer employment rights than salaried partners.
In conclusion, it makes economic sense to consider fixed-share members rather than salaried partners.
Mark Briegal is partner at Manchester solicitors Ralli and is responsible for the partnership law team. Contact him on 0161 615 0720, mark.briegal@ralli.co.uk or on www.rallipartnershiplaw.co.uk
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